There is no greater weapon than dependency. It can consistently be used against other parties, and other parties cannot do anything about it because of their dependency.
In a world tangled with rising geopolitical tensions, a crucial discussion has taken place – the future of the global financial system.
Specifically, the global trend is shifting towards a multipolar reserve currency system. The Dollar is gradually losing its status in the global financial system. On the other hand, the Chinese Yuan steadily grabbing the global market.
Between WWI (1914-1918) and WWII (1939-1945), the world witnessed the fallout of the Great Depression in 1930. This affected the global Gold Standard of trade harshly. Subsequently, when Europe was struggling to return to normal, the USA stood beside Europe as a ‘Beacon of Stability & Trust’.
By then, the USA had become the major holder of Gold, as, during the world wars, it was supplying weapons and goods to European allies in exchange for Gold. To combat the volatility and instability of their currency, European countries decided to pack their currency with the Dollar during a conference held in Bretton Wood, New Hampshire, USA, in 1944. Thus, the USD got the honour of becoming the global reserve currency.
Moreover, the United States launched its ‘Marshall Plan’, also known as the European Recovery Program. Post-war Europe desperately needed to reconstruct cities, industries, and infrastructure heavily damaged during the war. Therefore, the U.S. provided billions of Dollars on the continent as foreign aid, and the currency floated quickly because of its trustworthiness.
The more it floated, the more it made other countries to be dependent on the U.S., creating a ‘Network Effect.’
However, this reserve currency status gives the U.S. such unprecedented power over the world economy that it can cripple any country immediately.
The U.S. has weaponized this status to dominate giant economies like China and Russia.
This is where China and Russia came up with a master plan to kill the dominance of the Dollar.
Apparently, people have been predicting the demise of the USD as a global reserve currency for decades, but the discussion of de-dollarization picked up pace last year after sanctions were imposed on Russia over Putin’s invasion of Ukraine.
The sanctions sparked anxiety among countries that don’t even expect to have disputes with the U.S. The changes in the global currency landscape have already begun with efforts from China and its fellow ally countries.
The efforts of Chinese policymakers to boost their currency, the Yuan, have taken center stage. They have dumped around $100 billion worth of U.S. treasuries in the last 12 months.
And with that money, they are stacking up gold. International financial institutions in China are also adding more gold to their holdings, further challenging the Dollar’s status as the global reserve currency.
They are relentlessly working to earn other nations’ trust. An official report says China is sitting on around 2100 tons of gold, but the actual number is believed to be more than that.
The Chinese policy gurus are going all out to support their currency. China’s central bank gave the green signal to their state banks to start swapping the Dollar for Yuan.
The policy wizards are ready to stop Yuan from dropping. They are setting a stronger rate for the Yuan daily, ensuring it stays balanced and fair.
Moreover, Chinese policymakers are relaxing some rules, encouraging local companies to borrow from overseas. They are trying to attract investors from all over the world. All these moves are projecting a stronger image of China’s will for dominance.
Also, many countries such as Argentina, Brazil, Iran, and Russia have already started using Yuan in bilateral transactions with China.
However, there is still a comprehensive distance to cover before the Yuan can fully replace the mighty Dollar. If we look at the past 10 years’ data, the USD is surely in hot water.
In 1999, USD had around 71% market share among the global reserve currencies, but in the past 10 years, it has dropped to less than 59%. On the other hand, the Yuan’s market share is less than 3%. So, covering this significant distance is surely going to be a hectic marathon for the Yuan.
The USD has been the global reserve currency for over 80 long years, and around 79% of global transactions are concluded in Dollars. Changing this reserve currency would take a long time.
It took many decades for the British Pound to be replaced, and it will be the same with the Dollar. Although gold buying by China indicates that the Dollar’s dominance is eroding, the United States holds more than 8,000 tons, four times that of Chinese holdings.
The United States policymakers are well aware of this de-dollarization trend, and they are already adopting a more open and pragmatic approach to maintain their position and influence in the global financial system.
Simultaneously, they are reshaping their diplomatic policies that might create hurdles for China in the race to be the global currency.
Nevertheless, the global financial system is undoubtedly going through a major event of turbulence, and the next few years will inevitably be critical for the evolution of the global currency landscape. But the thing to look for is that the Yuan will be the giant slayer.